”It’s not what happens to you, but how you react that matters.”
Epictetus
Dear Fellow MEMF Shareholder,
This year reminded us what active investing truly means — to act when necessary, to be patient when appropriate, and to hold conviction when it stands tested, revisited, and reaffirmed under new circumstances.
Active investing can also mean diverging from the market — sometimes sharply. That divergence can be uncomfortable in the short term, as it has been this year, but it is also what drives long-term results. By definition, active investing means being different from the benchmark, taking positions built on conviction, not composition, and aiming to deliver differentiated and sustainable returns. In previous years, the same approach led to significant outperformance, and we believe it has once again left the portfolio better positioned for what lies ahead. Our focus remains unchanged: we aim to invest in high-quality, well managed companies that compound value over time and align with our strategy and responsible investment principles.
Portfolio companies have shown the same proactive spirit. CarTrade for example, expanded through the OLX integration and doubled its user reach; E Ink committed to new capacity for next-generation displays; TOTVS continued to build on its strategic acquisition of StoneCo’s Linx unit to strengthen its leadership in enterprise retail software; and Park Systems continued to broaden its nanotechnology tools across industries, just to name a few.
This spirit and innovation is clearly paying off as companies across the portfolio have delivered strong Q2 reports with many beating expectation and upgrading their outlooks for the coming years. CarTrade’s revenue increased by 22% YoY and Profit After Tax increased 106% YoY; E Ink’s revenue increased by 35% YoY and gross margin increased by 60% (+15pp); TOTVS’ earnings beat their EPS estimate by +1.6%; and Park Systems’ revenue increased by 17% YoY, 5% ahead of Bloomberg consensus.
Fundamentals Should Drive Recovery: Q2 2025 Reports
Despite these strong company-level results, this year has been challenging, with gains concentrated in benchmark-heavy countries and sectors. Tariff-related uncertainty in the first half of the year pushed investors toward “safe havens,” while in emerging markets, value outperformed quality as capital rotated into lower-valuation, more defensive sectors like financials amid EM rate cuts. A defence-led rally boosted industrials, and China’s stimulus- and liquidity-driven rebound lifted the benchmark.
Meanwhile, our overweight in software weighed on performance as companies delayed IT projects in a volatile environment. In general, much of the rally in emerging markets this year has been driven by a handful of mega-cap stocks, while less-known companies have attracted less investor attention. The MSCI Emerging Markets Index is up approximately 28% year-to-date, with internal analysis suggesting that the top ten Asian technology names account for almost half of these gains1.
In Q2, we began to see early signs of a potential reversal, indicating that recent portfolio headwinds may have been cyclical. This view is cautiously supported by improving macro conditions — including easing tariff volatility, momentum in AI and technology, further interest rate cuts, and a declining USD — as well as country-specific catalysts in India, Taiwan, Korea, and Brazil. While these factors could provide a more supportive backdrop, we expect any recovery to become clearer over the course of next year as these trends gradually come into play.
The quarter began with renewed tariff uncertainty as President Trump again delayed the implementation of reciprocal tariffs, allowing time for several major trade deals to be struck with the EU, Korea, and Japan. Finally, tariffs took effect on 1 August across more than 90 countries, hitting India and Brazil hardest at 50%. Since then, trade-related volatility has eased, and markets have reacted less sharply to new tariff announcements than earlier in the year, when smaller emerging-market stocks were disproportionately affected as investors rotated into larger, lower-valued names and other perceived safe-haven assets amid heightened uncertainty.
EM Quality has Fallen Behind EM Value YTD
During the early-year volatility, we increased our exposure to existing high-conviction names and selectively added new names from our watchlist by taking advantage of attractive valuations and temporary dislocations from companies that we believe were unfairly impacted by broader market sentiment. With tariff related volatility likely subsiding, quality names, should now be better placed for a recovery.
The technology sector once again outperformed most other sectors globally, driving gains in both the US and China. Strong Q2 results from US hyperscalers and confirmation of continued large-scale AI capital expenditure reignited confidence in AI-led growth. To put this into perspective, the Guardian reported that Big Tech has invested more than $155 billion in AI this year2 — roughly equivalent to the cost of building the International Space Station. Meanwhile, policy support for domestic chipmakers and new AI product launches from China’s leading technology firms have fuelled a rally in Chinese and Hong Kong tech stocks.
Hyperscaler Capex Driving AI Momentum
This strength in US and Chinese technology has also supported companies, including many in our portfolio, in emerging markets like Taiwan and South Korea which play vital roles in AI supply chains. For example, NVIDIA’s Rubin GPU rollout and rising ASIC volumes are boosting demand across the semiconductor supply chain, benefitting companies such as Elite Material, a global leader in high-performance copper clad laminates used in printed circuit boards. In its Q2 report, Elite announced an additional round of capacity expansion in 2026 due to strong demand, with revenue up 40% YoY. Other examples include Chroma raising its guidance for system-level testing revenue in light of rising demand from leading ASIC and GPU projects.
Other positive macro news for emerging markets comes in the form of the Federal Reserve’s first interest rate cut of the year this September, with rates now targeted at 4-4.25%. Fed officials also hinted that further rate cuts would follow in the remainder of the year. Lower US interest rates tend to benefit emerging markets by making lower yielding developed market assets less attractive, potentially prompting investors to seek higher returns in EMs some of which are also experiencing moderating local inflation, lower public debts and higher real rates. This can boost foreign direct investment and support EM asset prices. However, the impact is uneven, as greater risk appetite and lower US yields cannot fully offset weak macroeconomic conditions or poor corporate fundamentals in certain markets. Nevertheless, the continuation of the downward trajectory of global rate cuts should be positive for emerging markets overall.
Within our key markets, local factors are at play indicating the potential for country-level recoveries. Taiwan should benefit from the global AI momentum mentioned above with its global leadership in advanced semiconductors underpinning both industry demand and geopolitical importance. Korea should profit from a semiconductor recovery, as well as governance reforms and its Value Up initiative which is creating potential to unlock shareholder value by improving governance and capital allocation.
Meanwhile, India’s combination of fiscal prudence, resilient domestic consumption grounded in a young population, moderating inflation, and pro-growth policy support creates a constructive macro backdrop underpinning the country’s long term, high growth trajectory. In Brazil, while we expect volatility ahead of the 2026 elections, there is a clear path towards SELIC rate cuts and normalisation of real interest rates which would provide a catalyst for the Brazilian equities market.
China Rally Driven by Multiple Expansion, Not EPS Growth
While China has dominated headlines this year with a strong market rebound placing it among the top-performing countries, we believe the rally has been driven primarily by sentiment and policy stimulus, rather than underlying fundamentals, as reflected in persistently weak economic data this quarter. The lack of a clear recovery in the real economy raises questions about the rally’s sustainability. Additionally, the rally has been largely concentrated in the tech sector which is now trading at less attractive valuations. For these reasons, we continue to exercise caution. We have been carefully screening the Chinese market across select sectors to identify companies that meet our stringent quality and governance standards. While only a few appear potentially aligned with these criteria, we remain disciplined and will continue our search without compromising on quality.
Overall, as we reflect on the year, we are reminded of Epictetus’ words: “It’s not what happens to you, but how you react to it that matters.” While this year has presented significant challenges, it has only strengthened our conviction in both our strategy and our portfolio companies. Rather than being discouraged by volatility, we used it as an opportunity to deepen our positions in high-quality, well-managed businesses.
By staying disciplined and true to our active, conviction-driven approach, we believe we are now well positioned to benefit from key macro, country and sector specific tailwinds over the coming years. Reflecting this confidence, the team has increased its investment in the strategy — a clear signal of our optimism about the future of our portfolio companies and the opportunities ahead in emerging markets which we intend to capitalise on.
